2.11 Indirect Taxes

• What is an indirect tax?

  A charge paid to government on spending
• What does the term burden (incidence) of tax refer to?

  The portion of tax endured by a group
• When is the burden of tax on producers greater than on consumers?

  When PED > PES
• When is the burden of tax on consumers greater than on producers?

  When PES > PED
• What happens to producer revenue after tax?

  Producers receive less revenue after tax
• How is the new equilibrium price affected by a tax?

  It increases due to higher production costs
• What is the original equilibrium price before tax?

  £2.75
• What is the new equilibrium price after tax?

  £3.00
• What is the total amount paid to the government in tax?

  £100
• How is the burden of tax on consumers calculated?

  Area (P2 - P1) x Q2
• What is the effect of an indirect tax on consumer spending?

  It can reduce total consumer spending
• What is the price elasticity of demand (PED) given in the material?

  -1.22
• What are the advantages of using an indirect tax to correct market failure?

  • Reduces production and consumption of demerit goods
  • Leads to efficient resource allocation
  • Raises revenue for government spending
  • Market-based measure allowing consumer interaction
• What are the disadvantages of using an indirect tax to correct market failure?

  • Regressive nature increases inequality
  • Difficult to determine correct tax level
  • Price inelastic demand requires high tax
  • May lead to government failure if misapplied
• What is the purpose of sin taxes?

  To reduce consumption of demerit goods
• What does 'hypothecated' tax revenue mean?

  Tax revenue allocated to a specified use
• How can taxation influence economic activity?

  • Redistributes income and wealth
  • Meets government economic objectives
  • Affects overall economic activity
• What happens to consumer surplus when prices increase due to tax?

  Consumer surplus reduces as prices rise
• What is the impact of tax on producers?

  Producers sell less and receive lower revenue
• What is the effect of a tax in a non-failing market?

  It causes a welfare loss
• What factors must be considered when evaluating tax effectiveness?

  Size of tax, PED, and revenue use
• What is the significance of enforcement costs in taxation?

  High costs may reduce social welfare
• What was the fat tax in Denmark?

  A tax on fatty foods introduced in 2011
• Why was the fat tax in Denmark abandoned?

  Due to political pressure
• What are the main products commonly taxed by governments?

  • Alcohol
  • Tobacco
  • Sugar
  • Gambling
  • Petrol
• What is the new tax on vaping products scheduled to start?

  October 2026
• What is the planned change to the existing tax on tobacco?

  To increase it for financial incentive
• What is the status of fuel duty in the 2024 budget?

  Frozen with a 5p cut ending
• What is the purpose of taxing products like tobacco?

  To maintain financial incentives for healthier choices
• When will the new tax on vaping products start?

  October 2026
• What is the effect of increasing air passenger duty?

  It raises the tax on business class tickets
• What is the status of fuel duty in the 2024 budget?

  Fuel duty is frozen again
• What are negative consumption externalities associated with fatty foods?

  Health issues and increased healthcare costs
• What is the economic case for taxing fatty foods?

  • Reduces consumption of unhealthy foods
  • Internalizes external costs of health issues
  • Encourages healthier dietary choices
• How does price elasticity of demand (PED) affect tax impact on consumption?

  PED determines how much consumption decreases
• How does PED affect revenue raised by the tax?

  Higher PED may reduce tax revenue
• Why might a tax on high-fat foods be more effective than VAT?

  It directly targets unhealthy consumption
• What is meant by a regressive tax?

  A tax that takes a larger percentage from low incomes
• Why might a ‘fat’ tax be considered regressive?

  It disproportionately affects lower-income consumers
• What are Adam Smith's four canons of taxation?

  1. Equity: Fair contribution based on ability
  2. Certainty: Clear and predictable tax obligations
  3. Convenience: Easy payment methods for taxpayers
  4. Efficiency: Minimal excess burden on taxpayers